Investment banking lifts Morgan Stanley 2Q earns

Published: Thursday, July 18, 2013 10:30 a.m. CDT

NEW YORK (AP) — Morgan Stanley's second-quarter earnings and revenue jumped, fueled by gains in investment banking and wealth management.

The New York bank also announced Thursday that it would buy back up to $500 million of its own shares, news that surprised investors and helped boost the stock 5 percent in late morning trading. When companies buy their own stock, it's a sign that they think the price will go higher.

The bank also finished buying the retail brokerage firm Smith Barney from Citigroup, a yearslong process that has been central to CEO James Gorman's plan to reshape Morgan Stanley. He wants the bank to rely on the steady gains of managing people's money, rather than the spectacular profits — and spectacular losses — of riskier investment bank activities.

Morgan Stanley earned $898 million in the quarter after excluding the benefit of an accounting gain. It was a leap from $337 million a year earlier.

That worked out to 45 cents a share after stripping out the gain and a charge for the purchase of Smith Barney. Financial analysts polled by FactSet had expected 43 cents. Analysts' expectations generally strip out one-time items.

Revenue totaled $8.3 billion before the accounting gain, up 26 percent from a year earlier. That also beat the $7.9 billion that analysts had expected.

Revenue in the investment bank jumped 40 percent after excluding the accounting gain. The bank traded more stocks on behalf of clients, underwrote more stock and bond offerings and advised more companies on strategy. Revenue from selling and trading bonds for clients, a unit where Morgan Stanley's performance has been uneven, also improved.

Other banks have reported strong results in investment banking, helped by an all-time high in stocks in late May that drew investors and companies to the market.

Revenue rose 10 percent in the wealth management unit, which advises small and medium-sized businesses and wealthy individuals.

Gorman has been trying to pump up wealth management, most notably through the purchase of Smith Barney. That deal started in 2009 when Gorman was looking to build up the company's more stable brokerage unit after Morgan Stanley teetered in the financial crisis. The bank has steadily increased its stake in Smith Barney and it gained full ownership last month.

Besides steadier income, the retail brokerage is meant to give Morgan Stanley access to deposits, which helps it fund lending and other initiatives. Gorman has emphasized mortgages and other loans as a way to expand services to wealth management clients. Last year, the wealth management unit brought in more revenue than the investment bank, a significant shift from previous years. In 2008, the investment bank made up two-thirds of the company's revenue.

The acquisition hasn't been seamless. Combining the technology of the two brokerages has been expensive, and some employees have reportedly left over cultural differences. The bank emphasizes that remaining employees are more productive than ever: Annual revenue generated by each wealth management representative stands at $866,000, up from $664,000 at the end of 2009.

The trading of "value at risk," a way of measuring potential trading losses, continued to fall, another sign that Morgan Stanley is emphasizing wealth management over investment banking.

Cutting costs has also been a big part of the bank's response to stricter regulation and uncertainty in the economy. Morgan Stanley shed about 3,000 positions, or 5 percent of its workforce, in the last year.

Return on equity, a measure of the bank's profitability, rose to 5.2 percent from 3.7 percent a year earlier. That benchmark of profitability, however, fell from 6.2 percent in the first quarter and remains well below the 9 percent Morgan Stanley enjoyed in 2010. The failure to boost return on equity was part of the reason the company's board cut Gorman's 2012 pay.

The stock jumped 5 percent in late morning trading, up $1.34 to $27.88.